High Pump Prices: Oil Demand and Supply Factors

Gasoline is the bloodline that keeps our country moving. We are all affected by the rising gas prices in today's economy. Numerous factors can influence the price of gas at the pump. The United States consumes approximately on an average of 20 million barrels of oil per day, from which, 45 percent is used for motor gasoline. This high demand usually translates into higher gasoline prices, although that's not always the case. Price increases generally occur when the world crude-oil market limits their production.

United States depends heavily on foreign oil supplies. The largest entity impacting the world's oil supplies is the Organization of the Petroleum Exporting Countries (OPEC) which constitutes of eleven nations. OPEC is responsible for 40 percent of the world's oil production and hold two-thirds of the world's oil reserves. When OPEC wants to raise the gas prices it simply reduces the production. The short supply and the possibility of future reductions cause the prices to jump up. Several other countries including the United States, also contribute to the world's crude-oil supplies. OPEC monitors the production of these countries and adjusts its production to maintain the desired price.

The price of gas does not exclusively depend on the price of crude oil however; it does take the biggest portion of the cost. Refining of crude oil, distribution, taxes and station markups also play key role in building gasoline prices.

High prices serve as a symbol of a scarce resource. From the Law of demand we know an increase in the price of gasoline will generally decrease demand for gas. Elasticity is the measure to determine the change in demand due the change in price. (TCO 2 Law of Demand)

Price elasticity of demand is the percentage change in demand caused by a one percent change in price. It often predicts that a one percent increase in the price of a product will result in a two percent increase in...

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Price Elasticity of Demand
The price elasticity of demand measures the sensitivity of the quantity demanded to price. The price elasticity of demand is the percentage change in quantity demanded brought by a 1 percent change in price. The value of price elasticity of demand for a normal good must always be negative, reflecting the fact that demand curves slope downward because of the inverse relationship of price and quantity.
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To see why a business might care about the price elasticity of demand, let’s consider how an increase in price might affect a business’s total revenue, that is, the selling price times the quantity of product it sells. One might think that when the price rises, so will the total revenue, but a higher price will generally reduce the quantity demanded. Thus, the ‘benefit’ of the...

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Effects of Supply and Demand on the Price of Oil
Each time you pull up to the pump or open your utility bill, you may notice the price of fuel may have changed. There are many factors that can influence fuel prices. The marketplace forces of supply and demand determine the price of fuel. If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices.
Those principles apply at the service station level as well. If a retailer prices its gasoline too high, and without regard to competition, the retailer's customers may take their business to another station with lower prices. If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.
Competition among retail outlets thus affects pricing. You may notice that sometimes there are price differences between two gasoline stations on a busy street corner and between those outlets and the only station on a long stretch of highway. More choices generally mean more competition for business.
And although retail outlets may sell gasoline...